UK labour market stumbles: A warning sign for the economy

The latest ONS figures paint a sobering picture of Britain’s jobs market.

The UK labour market has entered increasingly uncertain territory. The latest data from the Office for National Statistics (ONS) shows a sharp decline in employment and signs of cooling wage growth – flashing warning lights on the economic dashboard.

In May 2025, the number of payrolled employees fell to 30.2 million – a drop of 274,000 compared to the same period a year earlier. This represents the largest annual fall in employment since the pandemic severely disrupted the economy. More concerningly, the pace of decline appears to be accelerating, with payrolls shrinking by 109,000 between April and May alone, according to early estimates.

Behind these headline numbers are very real pressures for businesses and households alike: employers reducing shifts, restaurants cutting staff, and families facing renewed financial strain.

Sectors Feeling the Strain

The decline in employment has not been evenly spread across sectors. Hospitality – often viewed as a barometer of consumer confidence – has been particularly hard hit. The accommodation and food service sector saw a loss of 124,000 jobs over the past year, reflecting both softer consumer demand and rising input costs for employers. By contrast, health and social care continue to buck the wider trend, adding 62,000 jobs over the same period. But even this resilience offers limited comfort in the face of broader signs of labour market softening.

The Pay Paradox

Headline wage growth remains positive. Median monthly pay reached £2,521 in May 2025 – up 5.8% compared to a year ago. However, the picture becomes more nuanced beneath the surface. Wage growth excluding bonuses has slowed to 5.2% in the latest quarter, suggesting a cooling momentum in pay settlements.

A significant portion of the annual rise is attributable to April’s National Minimum Wage increase of 6.7%. But for many households, real wage growth is still being eroded by persistently high living costs. Higher pay on paper isn’t always translating into meaningful gains in purchasing power or financial security.

Taxing Times for Employers

The sharp fall in employment is no mystery to many business owners. From April 2025, significant changes to employer National Insurance contributions came into effect, sharply increasing staffing costs. The employer NIC rate rose from 13.8% to 15%, while the secondary threshold – the point at which employers start paying National Insurance – was cut from £9,100 to £5,000 per year. According to the Chartered Institute of Taxation, these combined changes mean employers are now paying National Insurance on a larger share of each employee’s wages and at a higher rate.

While the government projects these changes will generate roughly an additional £25 billion in revenue annually, many businesses – particularly those in hospitality, leisure, and retail – are feeling the financial strain directly. Faced with higher wage floors, elevated operational costs, and increasing tax burdens, some companies are being forced to reduce headcount or scale back hiring to remain viable.

A delicate balancing act for policymakers

The wider economic impact is already feeding through. The unemployment rate has edged up to 4.6% – the highest level since mid-2021 – while vacancies have fallen by 63,000, highlighting weakening employer demand. Attention now turns to the Bank of England. With inflation pressures easing and wage growth showing signs of moderation, the case for interest rate cuts may strengthen in the months ahead. Yet policymakers face a familiar dilemma: How to support growth without reigniting inflationary risks.

The UK economy stands at a precarious juncture. The labour market is softening, business confidence remains fragile, and policy decisions over the coming months could prove pivotal in determining whether the current slowdown proves temporary or deepens into something more persistent.

But for many households, real wage growth is still being eroded by persistently high living costs.